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FSB at the Cannes Summit 8 June 2012 A Global Legal Entity Identifier for Financial Markets Table of Contents Abbreviations Executive summary.................................................................................................................... 1 Introduction ................................................................................................................................ 1 Key considerations and challenges to overcome........................................................................ 2 Proposals and recommendations ................................................................................................ 3 Implementation and next steps...................................................................................................6 Annex 1: Global LEI system diagram........................................................................................ 8 Annex 2: Recommendations for the development and implementation of the global LEI system........................................................................................................................... 9 Annex 3: Global LEI System High Level Principles ............................................................... 17 Annex 4: Initial elements for inclusion in a Charter for the global LEI Regulatory Oversight Committee (ROC) ...................................................................................................... 19 A Global Legal Entity Identifier for Financial Markets........................................................... 23 I. Introduction........................................................................................................................... 24 II. Objectives of the global LEI system.................................................................................... 25 III. Key considerations and challenges to overcome in building a global LEI system............ 28 IV. Principles underpinning the framework and design of the global LEI system .................. 32 V. Scope, scale and initial ambitions ....................................................................................... 35 VI. Pulling the LEI system together......................................................................................... 39 VII. Governance and the rules of the game.............................................................................. 48 VIII. Implementation and next steps........................................................................................ 55 Annex 5: LEI Implementation Group work plan diagram ....................................................... 60 Annex 6: Global LEI system Charter development diagram ................................................... 61 Annex 7: LEI Central Operating Unit development process diagram ..................................... 62 i Abbreviations BOD – Board of Directors COU – Central Operating Unit IFI – International Financial Institution LEI – Legal Entity Identifier LOU – Local Operating Unit ROC – Regulatory Oversight Committee SIFI – Systemically Important Financial Institution Executive summary This report sets out recommendations and proposals to implement a global Legal Entity Identifier (LEI) system that will uniquely identify parties to financial transactions. The report is provided to the Los Cabos Summit, to meet the mandate provided by the G-20 to the FSB at the Cannes Summit. Introduction There is widespread agreement among the public authorities and financial industry participants on the merits of establishing a uniform global system for legal entity identification. Such a system would provide a valuable ‘building block’ to contribute to and facilitate many financial stability objectives, including: improved risk management in firms; better assessment of micro and macroprudential risks; facilitation of orderly resolution; containing market abuse and curbing financial fraud; and enabling higher quality and accuracy of financial data overall. It would reduce operational risks within firms by mitigating the need for tailored systems to reconcile the identification of entities and to support aggregation of risk positions and financial data, which impose substantial deadweight costs across the economy. It would also facilitate straight through processing. But despite numerous past attempts, the financial industry has not been successful in establishing a common global entity identifier. The finance sector consequently lags well behind many other industries in agreeing and introducing a consistent global framework for entity identification. The financial crisis has provided a renewed spur to the development of a global LEI system. International regulators have recognised the importance of the LEI as a key component of necessary improvements in financial data systems.1 To provide additional impetus, the FSB was given a mandate by the G-20 to lead the co-ordination of international regulatory work and to deliver concrete recommendations on the LEI system by June 2012: ‘We support the creation of a global legal entity identifier (LEI) which uniquely identifies parties to financial transactions. We call on the FSB to take the lead in helping coordinate work among the regulatory community to prepare recommendations for the appropriate governance framework, representing the public interest, for such a global LEI by our next Summit.’ (Cannes Summit Declaration) To take the work forward, the FSB set up a time-limited Expert Group of key stakeholders with the following mandate: ● To deliver clear recommendations with respect to the implementation of a global LEI system to the FSB Plenary for endorsement. Specific recommendations should be presented for the following package: o Governance framework for a global LEI o Operational model o Scope of LEI reference data, access and confidentiality o Funding model o Implementation and phasing 1 Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions, Report on OTC derivatives data reporting and aggregation requirement, final report, January 2012. 1 The value of strong co-operation between private sector stakeholders and the global regulatory community in developing an LEI system is widely accepted. The Expert Group benefited from extensive input from an Industry Advisory Panel and discussions at a workshop in Basel in March. The FSB is very grateful for the support. The FSB Plenary has reviewed and approved the recommendations of the Expert Group.2 This Report provides the recommendations of the FSB to the G20 Summit for the development and implementation of the global LEI system. Key considerations and challenges to overcome Given that a unique LEI system for financial markets offers manifold benefits, an obvious question is why such a system is not already in place? The principal reason is that the benefits of the system are collective and accrue to users and the broader public as a group. There are insufficiently strong incentives in private markets to overcome two sources of market failure. The first is a problem of collective action and co-ordination, reflecting the challenges of gaining agreement that a particular identification scheme offers the best approach. The second reflects the problem of launching a network. The benefits from the system increase as more and more parties acquire an LEI. At the launch, however, as with other examples of network goods such as the telephone, the private incentives for potential early movers to acquire an LEI are low. To date it has proved impossible to get over this initial hurdle relying purely on voluntary adoption and market incentives. These market failures support the view that the LEI is by nature a public good, offering collective benefits that are hard to capture by private market incentives alone. In practice, public intervention, for example, that mandates the use of the LEI for reporting of exposures or positions may be needed to break down such barriers and take the initiative forward. Removing such barriers provides an opportunity for a co-ordinated approach between the public and private sector in delivering a global LEI system. That is why the recent CPSS- IOSCO Report on data reporting and aggregation requirements emphasised that: “as a universally available system for uniquely identifying legal entities in multiple financial data applications, LEIs would constitute a global public good.” There are many areas where public and private sector interests in the global LEI system are fully aligned (such as unique identification of entities, high quality reference data, integrity of systems, etc). But since the LEI system is by nature a public good, there is a need to make sure that the gains for the broader public are captured and that provision of the LEI is not exploited in ways that do not benefit the public. For example, if regulators mandate use of the LEI system, then both LEI registrants and users have no alternative but to use it. Absent any choice, the market is captive. There are consequently incentives for suppliers of the LEI to exploit their privileged position and hence risks that suppliers face incentives to overcharge registrants, restrict access, cut corners on data quality, or to use a position of privileged access to LEI information to supply other revenue-generating services on non-competitive terms. These arguments provide the motivation for the mandate provided to the FSB to produce recommendations for a governance framework for the LEI that identifies and provides
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